The crypto market witnesses the "retail investor vs Wall Street" scenario: a battle between DEX and CEX

In 2021, the showdown between retail investors in the United States and Wall Street short-selling institutions centered around GameStop played out once again, this time shifting to the crypto market. On March 26, an investor single-handedly pushed a decentralized exchange to the brink of nearly $230 million in losses.

This is not just a simple technical failure, but also involves a crisis of decentralization, compromises of ideals, and the intense clash of interests among various parties in the encryption trading ecosystem. Let's review the beginning and end of this event and discuss who the ultimate winner is, and whether retail investors have truly emerged victorious.

Retail investors squeeze, the platform cuts off its losses.

In just one hour, JellyJelly experienced a short squeeze, skyrocketing by 429%. Subsequently, a decentralized exchange took over a trader's short position after a self-explosion, with an unrealized loss exceeding $12 million at one point.

The situation is critical: If JellyJelly rises to 0.15374 again, the exchange's $230 million in funds will be at risk of total loss. As funds continue to flow out, the liquidation price of JellyJelly will be further suppressed, creating a vicious cycle.

The attacker precisely exploited the four critical vulnerabilities of the exchange system:

1. Illiquid assets lack real position limitations.
2. Weak oracle anti-manipulation mechanism
3. Automatic Position Inheritance System
4. The absence of a circuit breaker mechanism

This is not just a trading operation, but a precise strike against systemic weaknesses, pushing the exchange into a dilemma: either watch the $230 million treasury face liquidation risks or abandon the principle of "decentralization" and use emergency measures to intervene in the market.

Market sentiment has reached its peak, with many retail investors joining the hunt. Some influential industry figures are also calling on major centralized exchanges to participate on social media. A response from an executive at a well-known exchange has triggered another fluctuation in the price of JELLYJELLY.

Just when retail investors thought victory was in sight, the decentralized exchange initiated an emergency validator vote and quickly delisted the JELLYJELLY token. This decision reached "consensus" in a very short time, and the platform subsequently issued an official statement announcing that the governance committee had urgently intervened and delisted the involved assets, demonstrating the platform's attitude of "stabilizing the market" and forcibly calming this short squeeze.

This historically intense crackdown ultimately ended with the platform side exiting first.

The "Decentralization" of DEX is Questioned: The Disillusionment of the Free Market?

This event indicates that, even in the near future, a fully decentralized exchange will only exist in ideals.

It exposes significant vulnerabilities of certain decentralized exchanges: allowing oversized positions to be opened on low market cap, low liquidity tokens, for which the market cannot find counterparties during liquidation at all. In other words, the market depth cannot support such large trading volumes, and once a short squeeze occurs, liquidity collapses directly, rendering the liquidation mechanism virtually ineffective.

Exchanges of this kind should play a fair referee role, but in this incident, they not only participated in the game but also changed the rules when the situation became unfavorable, even directly shutting down trading.

Confidence in decentralized exchanges has been shaken. The rapid decision-making of the "governance committee", the "consensus" passed in a short period, and the sudden closure of trading pairs have all raised questions: does the so-called "decentralization" only work when the market is stable, and does it turn into arbitrary manipulation once it is out of control?

If decentralized exchanges can also "force delist", then what is the meaning of decentralization? Are centralized exchanges more reliable, or are decentralized exchanges more trustworthy?

The Contradiction Between Decentralization Philosophy and Capital Efficiency

From the perspective of "decentralization", decentralized exchanges seem to be safer because assets are always controlled by the users themselves, eliminating concerns about centralized entities misappropriating them. The automated market maker mechanism ensures the feasibility of decentralized trading, but the drawbacks are also evident: poor liquidity, high slippage, and impermanent loss, resulting in an average user experience. Most people use decentralized exchanges either for long-term holding or to participate in airdrop activities, leading to a subpar daily trading experience.

Centralized exchanges are user-friendly, have ample liquidity, and powerful features. Whether it's contract trading or spot trading, the experience is very smooth. However, there are risks: once funds are deposited, users lose control. There have been multiple incidents in history where exchanges were hacked or went bankrupt, and no one can guarantee that the exchange they use won't be the next victim.

This incident is a typical manifestation of such a dilemma: there is an inherent conflict between the concept of decentralization and capital efficiency. Pursuing absolute decentralization will inevitably affect capital efficiency; whereas pursuing the highest capital efficiency often requires some degree of centralized control.

This is a classic dilemma: Should we adhere to the principles of decentralization, accepting potential systemic risks and a loss of capital efficiency, or sacrifice some decentralization when necessary to ensure system security and capital efficiency? The exchange involved chose the latter, taking emergency measures to protect the protocol in the face of massive losses, but this also drew severe criticism.

It is worth noting that many critics have faced similar dilemmas themselves. For example, a well-known derivatives trading platform also took emergency measures to directly suspend trading during the market turmoil on March 12, 2020. Opinions in the industry differ on such measures. Some argue that if emergency measures had not been taken at that time, it could have had catastrophic consequences for the entire crypto industry. This highlights the complex relationship between ideals and reality.

The Next Stage of Development in the Crypto Market: Complementary Advantages and Blurred Boundaries

Looking ahead, decentralized exchanges may develop towards a direction of "partial centralization + transparent rules + intervention when necessary," rather than pursuing the extremes of "complete decentralization + market laissez-faire" or "complete centralization + black box operations + intervention at any time."

Between encryption culture and capital efficiency, the new generation of decentralized exchanges will seek a balance that preserves sufficient on-chain transparency and user control while effectively protecting system security and user assets in times of crisis. This balance is not a betrayal of ideals, but a pragmatic response to reality.

Centralized exchanges are also facing a transformation. In response to users' concerns about asset control and the competitive pressure brought by decentralized exchanges, centralized exchanges are undergoing a strategic transformation centered around Web3 wallets. Whether it is industry leaders, established exchanges, or emerging platforms, they are trying to balance the convenience of centralized trading with the security guarantees of decentralization through the "centralized exchange + Web3 wallet" model:

• A well-known exchange has not only expanded its business scope by actively developing wallet services but has also successfully solidified its position in the industry.
• Another leading exchange acquired a well-known wallet as early as 2018, but it wasn't until the rise of the decentralized exchange market that it truly began to value its Web3 wallet business, significantly increasing its investment in research and marketing.
• Some established exchanges are also keeping up with the trend by building their own Web3 wallets and have specially set up innovative zones to gather popular Meme coins and emerging projects, in order to meet users' trading demands for high-risk, high-return assets.
• In recent years, emerging exchanges have proactively launched fully functional Web3 wallets and have been the first to integrate into multi-chain ecosystems, seeking differentiated positioning in the intense competition.

This transformation not only responds to user needs but also aligns with the development logic of the industry. By integrating Web3 wallet functions, centralized exchanges preserve depth and efficiency while providing users with the choice to independently control their assets—users can decide when to place assets in the exchange's custody for convenience and when to transfer them to their own wallets to ensure security.

As the industry matures, we may see more solutions that coexist with "bounded decentralization" and "transparent centralization." In this new stage of integrated development, only participants who can find the best balance between transparency, security, and efficiency will stand out in the increasingly intense market competition.

Combining the efficiency of centralized exchanges with the transparency of decentralized exchanges may be the next development stage of crypto trading—not a contradiction of ideals, but a fusion of advantages.